What is an ESOP or Employee Stock Ownership Plan?

Answer:
Employee Stock Ownership Plans, or ESOPs,

are a type of employee benefit plan which shares a number of similarities to profit sharing plans. Employees can own stock in a company through a variety of ways such as by buying the stock directly, receiving profit sharing contributions, receiving stock options, or through an Employee Stock Ownership Plan.

These plans usually are a perk, contributed to the employees, rather than plans where the employees must purchase stock. The company who creates an ESOP sets up a trust fund where they contribute either new shares of company stocks or funds that will be used to purchase shares.

Financing by the company to buy shares is permitted when the company makes cash contributions into the trust fund in order to repay the loans. The company’s contributions are tax deductible up to certain limits. Once set up, ESOP shares are allocated to eligible employee accounts using either a formula or percentage of the employee’s pay.

A vesting schedule is put into place that usually takes several years for the employee to become 100% vested. As vesting is increased, the employee gains a right to the shares held in the account. When leaving the company, the company will buy back the shares at the fair market value.


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